[VSA] Volume Spread Analysis Part II

[DbPhoenix]

	Quote:	habi
	Db, Bearbull I think, we are all interested in VSA as a whole. And since VSA is based on Wyckoff, we are interested in this theorie too. The point is not, that we are not interested in other versions how to read price/volume action, but it seems, that we are not able to follow exactly what you mean. Let's look at yesterday's price action. Price went down near 1360-support, then up to close the regular session gap and then down again on lower volume. As Db mentioned, this was the point to find an entry. Once you have taken the long position, you follow the price action. Is it possible to describe, what you are doing now? Do you follow the price action just in a 1 minute- or any other chart? What are your thoughts, when you see the higher volume between 1371 and 1375? Db said, that support was on 1360 and resistance 1380. Do you saw some weakness when we reached 1377.50 or was it just resistance from yesterdays high to close the position, assumed, that it was closed there? In my view, this trend was of good quality until the top and also the following downmove was not that worse. Please give us some examples, how you read the price action, there is no need to post them in realtime. Just, that we have a better understanding what you mean.

Providing commentary in hindsight is difficult if for no other reason than one knows what happens. One can put oneself into a state of complete ignorance when, for example, replaying a day at a later time to analyze his moves (or failure to move, as the case may be), but it's not easy.

Therefore, when going over charts such as these, one has to rely on principles and not take the easy Oh, yeah, well, I would have done so and so.

So.

As I mentioned on the RT thread a few days ago, 1370 was the S/R level to watch since this went all the way back to January. Once that was reached at the end of the day on the 1st, one had only to sit on his hands and wait to see what price did there.

The following day, price extended itself either side of this line, like a dog on a leash.

WARNING! Market Profile Will Be Mentioned Here!

While I'm not expert on MP, this is what I believe is called a tentative search for a new value area, or what Wyckoff would call a search for equilibrium. If all of this were the result of short-covering, the buying would have dried up abruptly and there would have been nothing to sustain the market at this level. If it were distribution, the market would have reversed since whatever other buying had taken place would have been weak. However, price stayed up here, hovering between 1363 and 1377, at least initially. Later in the day, resistance at 80 was confirmed, as was at least preliminary support at 63.

The following morning, given the reaction to the jobs report, one could expect at least a test of 60 since price was only a point or two away. If price had not reached that level, one could use 61 (life is not quite so exact as we would sometimes like). In any case, price poked just below that level at 09:15. Using the chart posted, this occurred at point A. Using the 5m OHLC bar, note the position of the "open" and "close" of the bar. (Tune noted yesterday elsewhere that price does what it does regardless of what bar interval we choose or what type of bar we use or even if we use a bar at all; therefore, a rejection of 60 is a rejection of 60, whether it's a tick or a 1h candle.)

The test of this occurs at "B", at 09:45, and one can see even with the 5m bar that this level is soundly rejected once again. Those who use candles and are used to blending them in their heads will also note that B and the bar following create a "hammer-type" candle. Whether one enters here or not is a matter of whatever his trading strategy happens to be.

Thereafter, the situation is tossed due to the ISM report. But any entry would already have been taken, so the scrambling around would have had no effect unless price had gone the opposite direction. Instead, one notes that price hit the midpoint of the S/R range -- 70 -- within a tick. Since he's already in, there's nothing for him to do.

If he isn't already in, he can wait for the retest. There may be no retest, in which case the trader can elect to do nothing or look for a less-than-ideal entry. But, in this case, there is one, in the "F" area. The only volume of note inbetween is at 10:25 (the volume bars in the posted chart are offset by one). This results in a bar with a "close" that suggests buying coming into the market. It's not climactic and it's not "stopping" volume, but it does retard the decline. When price does get around to testing support, there's nothing remarkable about the volume, but the close is well off the low. The drama is provided by the following volume bar and price bar at 11:05. This says, "Yes, you were correct."

Thereafter, volume is largely irrelevant. What matters to the trader is whether or not price makes higher highs and higher lows. There are many bars that might be considered troublesome, but if he focuses on traders rather than on bars, he has no reason to be concerned until at least the midpoint is reached, here near lunchtime. At that point, he notes the near-term potential S&R that have been established and remembers that lunchtime is often a time for consolidation or simply drift. The line drawn on the posted chart at "G" addresses this, and price does in fact find support there in the "J" area. When price then resumes its advance thereafter, the trader has nothing to do but wait for a test of resistance. This occurs at 13:25 when we get as near as 78, two points away from 80.

At this point, the trader has several choices. He can draw a demand line from "J" across the bottom of the 13:10 bar and exit on a breach of that. Or he can wait for a breach of the last swing low at "K". Or he can wait for a breach of the demand line as drawn under "M". It all depends on how much confirmation he requires that the market is done and how well he's dealt with any tendencies he may have toward hope.

As to alternate entries, he understands that there is a trade-off between information risk and price risk, i.e., the more he wants to know, the further away from the ideal entry he will be and the more price risk he will assume. If, for example, he chooses to wait until he can draw a tentative demand line, which would be drawn here under the bar following "F" and the bar marked "H", he would then later be faced with having to juggle the seeming support provided by the swing high at "G" and the fact that his demand line had been broken (though he would also remember that a demand line of that angle would be begging to be broken). He could go ahead and take the risk of entering around "J" and would be proven correct in that it wound up being a profitable entry. But it would have been worth up to six or seven points less. Plus he'd be very near the midpoint and potential reversal. Or he could wait for a pullback, here at "K". But then he'd be entering very near the top (which is not unheard of).

Thus entering off trendlines or channel lines is by definition a later entry than entering off retests -- preferably at support or resistance -- since the lines can't be drawn until price has made a substantial amount of progress. Again, it's a trade-off between information risk and price risk.

[Bearbull]

Well, habi , you will be hard pressed to get a better explanation than what Db has posted.
You do not have to manage your trade via 1min or tick chart, if you are comfortable with 5min , stick with it, the key is to be consistent, where you move stops etc depends entirely on your risk tolerance. You could adopt Tom Williams advice of moving the stop below a bar which closes above the previous close in case of a long trade and keep doing so as long as there is only one down bar, 2 downbar and you are out. Prices then may or may not keep going up. It all depends on how thoroughly you have tested your setup, entry, trade management, rewards/risk etc.

[DbPhoenix]

	Quote:	Bearbull
	It all depends on how thoroughly you have tested your setup, entry, trade management, rewards/risk etc.

Also depends on whether conditions are ripe for a trend day. Breathes there a trader with soul so dead who hath not banged his head against the wall and said "Why did I insist on shorting the whole way up? Why? Why? Why?" ( or why did I exit with only 5 points.....)

[habi]

Thanks Db for the elaborate explanation. I have to reread it tomorrow once again. What I'm most surprised about is your statement:
"Thereafter, volume is largely irrelevant"
I see often, that when high volume comes in, at least a retracement occur. Today e.g., short after the highest volume spikes in a 3 and 5 minute chart we saw the start of the largest move for the day. o.k., at this time we could not know, that it will be the highest volume for the day, but it was at least the highest volume since the "open".


"the key is to be consistent"

Yes Bearbull, I fully agree with your statement, I'm working on it.

[DbPhoenix]

	Quote:	habi
	Thanks Db for the elaborate explanation. I have to reread it tomorrow once again. What I'm most surprised about is your statement: "Thereafter, volume is largely irrelevant" I see often, that when high volume comes in, at least a retracement occur. Today e.g., short after the highest volume spikes in a 3 and 5 minute chart we saw the start of the largest move for the day. o.k., at this time we could not know, that it will be the highest volume for the day, but it was at least the highest volume since the "open".

You're leaving out the most important part: "Thereafter, volume is largely irrelevant. What matters to the trader is whether or not price makes higher highs and higher lows."

If you're not getting higher highs and higher lows, then of course volume assumes a much more important role. Taking your example above, there was nothing special about volume until 10:15. At that time, you had what was clearly climactic volume, even though price was at least ten points above support. The blended bars also formed a hammer. Price then rallied and came back down for a retest with a slightly higher low and lower volume, again forming a blended hammer. This was in principle (otherwise I wouldn't bring it up) just the sort of setup one is supposed to take, even though there is no apparent reason for it to take place at that particular level (or at least none that I could see).

However, again, once price is in gear and you begin making higher highs and higher lows, volume is largely irrelevant. Only when the momentum begins to curve and price begins to hesitate does one need to pay attention to volume. Even then, though, unless the volume is climactic in nature, the more important focus is demand lines and previous swing points. If price maintains its course, there's no reason to exit. Today, for example, price made it to 83 without ever breaking stride (no pun intended, Wyckoff fans).

[DbPhoenix]

	Quote:	DbPhoenix
	Taking your example above, there was nothing special about volume until 10:15. At that time, you had what was clearly climactic volume, even though price was at least ten points above support. The blended bars also formed a hammer. Price then rallied and came back down for a retest with a slightly higher low and lower volume, again forming a blended hammer. This was in principle (otherwise I wouldn't bring it up) just the sort of setup one is supposed to take, even though there is no apparent reason for it to take place at that particular level (or at least none that I could see).

For those of you who are wondering what the hell is he talking about, apologies are in order. It has been brought to my attention that neither habi nor I provided a chart of today's activity. Perhaps if I had, I would have noticed that I was offering commentary on the ES chart while staring fixedly at the NQ. The differences are negligible, but unless I offer both, the post above makes no sense.

So.

Note first the NQ. You've got the aforementioned climactic volume and blended bars that create a hammer (that's the blended bar to the left of the two bottom climax bars). Then you've got the retest, which makes a higher low on lower volume. These two bars also form a hammer when blended (you can do that in your head).

Now the ES. Here you have essentially the same dynamic except that the retest is a lower low, not a higher one. Also the blended bars do not form hammers that are quite so in your face.

Other than that, the principles are the same: climax, retest, Go!

Sorry if I gave anyone a headache.

.

[Sledge]

It was a wicked ride today on the GBP. Posting a 1 hr Chart.

Last night London Marked the Market up as a primer to the forthcoming pathetic NFP #'s (est -50K, actual -80K)

1. You can see on the chart volume that EOD Thursday into Thursday evening we had a rash of "No Demand" bars noted by the "X's"

2. You see that in the opening hours of London the professional $ Marked the market up significantly to "set the trap" on the would be bulls. Note the trendline drawn on the chart- this is drawn on a DAILY timeframe and was drawn 3 days ago. Look where the upthrust/hidden potential selling bar (no such thing- but hey.. it is what it is) reaches. Beautiful!

Once again proving the VSA theory that with the bad news for the USD looming- if the supply and demand are in the right position- they will use it to their advantage and make the "herd" pay dearly!

Sledge

hourlygbp.jpg

[zeon]

	Quote:	DbPhoenix
	... even though price was at least ten points above support. [...] This was in principle (otherwise I wouldn't bring it up) just the sort of setup one is supposed to take, even though there is no apparent reason for it to take place at that particular level (or at least none that I could see).

Why isn't the 57.50-60 area support on the futures? I agree there's another support level 10 points lower, but according to how I define S (and that might not be the right way to do it), that particular level was very significant to me...

On the attached charts, I've annotated all the "action" around that level: 3,4,5,6,7,8,9. Please tell me if I'm just imaginening things here

The levels are 50-52.50 because this is a chart of the cash market, but apart from the offset, it's the same on the futures (57.50-60).

[DbPhoenix]

See my previous post, above.

[zeon]

	Quote:	DbPhoenix
	See my previous post, above.

Ehm, sorry? I don't see any references to what I mentioned in my post about S/R at that particular level.